My Nationalization Problem--and Ours

Ever since banking stocks started plummeting, or should I say replummeting, a couple of weeks ago there's been renewed interest in nationalization. In some ways the question is pure semantics. Ever since Henry Paulson gathered banking CEOs at the Treasury Department last year and told them that the government was going to stick capital injections in their aching behemoths, we crossed a line that involved partial government ownership. Even as they beg for more handouts, the bankers are, not surprisingly, resisting the idea. Yesterday at the World Economic Forum in Davos, Jamie Dimon, the head of JPMorgan Chase, denounced all the nationalization talk. "JPMorgan would be fine if we stopped talking about (the) damn nationalization of banks ... we've got plenty of capital," Dimon said. And Treasury Secretary Tim Geithner decried the term yesterday, too. I think Dimon and Geithner are basically right in the sense that we're not going to full nationalization and its a distracting term. Utilities are the better model.

But the fits and starts towards wherever we're heading are deeply worrisome. It's worth noting what happened with Credit Unions last night. Credit Unions are owned by their members and they offer, as anyone who's joined them knows, very favorable terms to those who are lucky enough to be able to sign up for one. They also have had the advantage of being relatively conservative. They don't have wild-ass hedge funds under their wings like Citigroup does. And they generally don't trade in mortgage backed securites but some do. Thus they're not immune from the financial turmoil that's unfolding.

Last night, the federal government pumped a $1 billion into the ailing institutions. The federal, National Credit Union Administration, the agency that regulates credit unions, had to pump the money into an outfit called the U.S. Central Corporate Federal Credit Union which links together the corporate credit unions. That federal agency also said it would start backing up the investments that retail credit unions have in corporate credit unions.

In other words, you have a classic contagion where even the good, responsible credit unions are in trouble. (And that's leaving aside the problems they have with members who are in trouble on their mortgages, car loans, etc.) You have lots of government money going in but no nationalization, for better or worse.

There's not going to be government management, let alone ownership, of credit unions. The bad side of this is, of course, we've got the classic problem of private profit and socialized risk that plagues regular banking. That's a messy situation but nationalization, it ain't.